01
Limits, Alternatives, and
Choices
McGraw-Hill/Irwin
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction
LO1
Economics defined
Economic wants exceed
productive capacity
A social science concerned
with making optimal choices
under conditions of scarcity
1-2
Economics
An inquiry into the nature and causes of
the wealth of nations. (Adam Smith)
Economics is a study of man in the
ordinary business of life. It enquires how he
gets his income and how he uses it. Thus, it
is on the one side, the study of wealth and
on the other and more important side, a
part of the study of man. (Alfred Marshall)
The Economic Perspective
Scarcity and Choice
Resources
are scarce
Choices must be made
Opportunity cost
Theres no free lunch
LO1
1-4
Theories, Principles, and Models
The scientific method
Observe
Formulate a hypothesis
Test the hypothesis
Accept, reject, or modify the hypothesis
Continue to test the hypothesis, if necessary
LO2
Economic principles
Generalizations
Other-things-equal assumption
Graphical expression
1-5
LO3
Microeconomics and
Macroeconomics
Microeconomics
Decision making by individual units such as
people, individuals business units.
I.E Price of a specific Product
Macroeconomics
Examines either the economy as a whole or its
basic subdivisions or aggregates
Such as total output, total
employement/unemployement, total expenditure.
I.E Govt. decision making
1-6
Positive and Normative Economics
Positive economics
Deals with economic facts, cause and
effect relationship.
Includes description theory, development
and testing.
Normative economics
LO3
A subjective perspective of the economy
Value judgment of economy such as what
particular policy action is recommended to
achieve a desired goal.
1-7
Individuals Economizing Problem
LO4
Limited income
Unlimited wants
A budget line
Attainable and unattainable
options
Trade-offs and opportunity costs
Make the best choice possible
Change in income
1-8
Individuals Economizing Problem
12
DVDs Books
$20
$10
10
6
0
5
2
4
4
3
6
2
8
1 10
0 12
Quantity of DVDs
$120 Budget
Income = $120
=6
Pdvd = $20
Unattainable
Income = $120
= 12
Pb = $10
4
2
0
Attainable
10
12
Quantity of Paperback Books
LO4
14
1-9
Societys Economizing Problem
LO4
Resources are always
SCARCE
Scarce resources
Land (All natural resources
used in production process.)
Labor (Physical and mental
talent used in production
process)
1-10
Societys Economizing Problem
Cont.
Capital
(All
manufactured aid used
LO4
in production process such as
storage, transpiration)
Entrepreneurial Ability
(They are distinct from labor.
Combine resources from Land,
Labor, and Capital to produce
goods)
Takes initiatives, makes decisions,
innovates, and takes risks)
1-11
Production Possibilities Model
LO5
Illustrates production choices
Assumptions
Full employment
Fixed resources
Fixed technology
Two goods
1-12
Production Possibilities Model
Production Alternatives
Type of Product
Pizzas
10
(in hundred thousands)
Industrial Robots
(in thousands)
Plot the Points to Create the Graph
LO5
1-13
Industrial Robots
Production Possibilities Model
14
13
12
11
10
9
8
7
6
5
4
3
2
1
The law of
increasing
opportunity
costs makes
the PPC
concave.
A
B
C
Unattainable
Attainable
E
0
Pizzas
LO5
1-14
Industrial Robots
A Growing Economy
14
13
12
11
10
9
8
7
6
5
4
3
2
1
A
B
Unattainable
A
B
C
C
Economic
Growth
D
Now Attainable
Attainable
E
0
Pizzas
LO6
1-15
The End
1-16
